Financial accounting: Stock market Fall Questions
Background to the Study
In the recent past, the economy of China has been slowing down. After about a decade of growth which averaged 10% per annum, Chinas economy has been growing at an average of only about 7% in the last 2 years (Myers, 2016). In 2014, it grew at an average rate of 7.3% but declined to only 6.9% in 2015. Basically, the very latest statistics paint a very grim image for Chinas economy, with the rate of growth registered in 2015 (6.9%) being the slowest in the last 25 years. The last three months to December 2015 registered an average growth of only 6.8% (Centre, 2016).
As a result of this worst ever economic performance for China in a quarter of a decade, concerns are emerging about the possible impacts on the financial markets across the world (Suzuki, 2014). Given the fact that China is the world’s second largest economy, any economic slowdown is bound to have far-reaching financial effects on the world in general and major economies in particular. It is for this reason that the US – which is the world’s largest economy – is particularly concerned. It is especially expected that the US stock market might be negatively impacted by the slowdown in China (Gough & Bradsher, 2015).
At the start of trading in 2016, both the Dow and NASDAQ registered significant declines. The Dow fell by as much as 467 on the first day of trading. However, it managed to recover slightly to end the day 276 points down. On the first trading day of 2016, NASDAQ lost 2% (Centre, 2016). These losses in the US stock market were directly attributed to overnight crashes of stocks in China. As such, the first panic attack affecting the US is from the economic slowdown in China, a slowdown which seems to be dramatically faster than had been anticipated. There were expectations that Chinas economy would peak and slow down at some time after having grown almost constantly for the last two decades. However, it was not expected that it would slow down so fast. It is this fast rate of decline that is triggering panic in US stock markets (Nielsen, 2015).
The problem is that while there are justified concerns about the economic slowdown in China, it is not known how this slowdown might impact the US stock markets. Furthermore, there has been increased pressure on China to intervene and avert a prolonged slowdown of its economy. This stems out of concerns that such a prolonged slowdown might hamper growth in the US and other nations that are dependent on Chinas economy (Restrepo-Echevarria, 2015). However, it is still unclear the exact impact such a prolonged slowdown might have on the US stock market.
The other problem is that the manner in which Chinese authorities have been handling the situation has only tended to heighten concerns that global financial markets might be negatively affected (Suzuki, 2014). The authorities in Beijing have tended to approach monetary and fiscal policies with a lot of uncertainty, heightening rather than easing concerns in global financial markets and especially the US stock market that a financial crisis might be sparked. With the stock market in Shanghai declining to the lowest levels ever registered in 13 months even in the face of a rescue package from the government, US financial markets have been bracing themselves for tough times ahead (Lee, 2015). As yet, however, it remains unknown how the economic decline in China has affected or is likely to affect the US stock market.
Then there is the problem of the weakening yuan. Chinese authorities have been willingly letting the yuan to depreciate against the US dollar (Restrepo-Echevarria, 2015). This has made it even harder for analysts to predict the exact impact the decline of both the yuan and the stock markets in China might have on the US stock markets. Finally, the extent of the interconnectedness of the US and Chinese economies is still quite unclear. It is generally accepted that the economy of China has become a major influencer of the economies of other nations. This means that shocks in China can have far-reaching effects in other countries, including the US (Centre, 2016). Unfortunately, the exact level and nature dependence of the US stock market to Chinas economy are not empirically known; and this could be attributed to lack of knowledge on the extent to which the entire US economy is actually dependent on the economy of China.
The proposed study is therefore of great importance in at least two ways. First and foremost, its findings will help bring about an understanding of the level and extent of interconnectedness between the US economy and the economy of China. Secondly, it will help to empirically determine the extent to which the US stock market is susceptible to shocks and turbulence in the Chinese economy as well as the implications this might have for the US stock market.
Aim and Objectives of the Study
The main aim of the proposed study will be to investigate the impacts which the economic slowdown in China is likely to have on the US stock market. The study’s objectives will be as outline below:
- To ascertain the extent to which the US stock market is susceptible shocks in the economy of China.
- To investigate the likely impacts that the current slowdown in the economy of China has or might have on the US stock market.
- To explore possible monetary and fiscal policies which the Chinese authorities can implement to stabilize the economy and therefore reduce threats to other global markets.
In order to achieve the above objectives, the proposed study will have to answer the following research questions:
- To what extent is the US stock market susceptible to shocks in the economy of China?
- What are the likely impacts of the current slowdown in the economy of China on the US stock market?
- Which monetary and/or fiscal policies can the Chinese authorities implement to stabilize the economy of China?
Proposed Research Methodology
The proposed study will use mixed research methods. This essentially means that both qualitative and quantitative research methods will be used. This will make it possible to collect both qualitative and quantitative data. Qualitative research methods will be useful in providing in-depth analysis of the phenomenon and collection of description data. On the other hand, quantitative research methods will be useful in providing numerical data. Essentially, mixed research will be necessary because of the need to collect and analyse both descriptive and numerical data.
Methods of Collecting Data
Both primary and secondary data will be collected. Primary data will be collected through interviews. Those interviewed will be financial market experts drawn from both the US and China. At least two expert interviews will be conducted to obtain the interviewees opinions and perceptions of how the economic slowdown in China is affecting and/or might affect the US stock market. Telephone interviews will be used to expedite the process and also reduce costs associated with the study.
In addition to the interviews, secondary research will also be conducted. This will entail carrying out a meta-analysis of the existing research on the subject matter. Basically, an analysis of existing publications – including journal articles, books, and other publications – will be undertaken to establish other researchers views on the actual and likely impact of Chinas economic slowdown on the US stock market.
More importantly, appropriate economic data will be searched and retrieved from various publications. The data will be mainly about the US stock market and general economic performance of China. Data will mainly be derived from leading publications such as the U.S. Bureau of Economic Analysis, the National Bureau of Statistics of China, and the World Bank. The goal will be to ascertain any changes in the performance of the US stock market that could potentially have been occasioned by corresponding changes in the economic performance in China. The period of time to be covered will be the last two years (between January 2014 and December 2015).
Analysis of Data
The collected data will be synthesized using thematic analysis. Emergent themes in the data will be identified, coded, and linked to relevant research questions. Data from both interviews and secondary research will be analysed using thematic analytical methodology. However, numerical data will be analysed using appropriate statistical analyses, including the descriptive statistics and the Statistical Package for the Social Sciences (SPSS). SPSS will be especially useful in ascertaining whether or not there is any relationship between changes in economic performance in China and corresponding changes in the performance of US stock markets.
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